Is Gold Good Protection Against Inflation?

Source: Credit Suisse Global Investment Returns Yearbook 2012, from John Waggoner, Money Magazine

So far, inflation has been but a distant blip on the radar screen, something to be aware of but too far away to pose an immediate danger.

But if inflation does raise its ugly head, what type of investments can provide you with the best protection?

After all, if your portfolio can’t keep up with inflation, you’ll lose purchasing power on a daily basis. That’s of concern to investors of all ages, as the cost of basics like food, insurance, and medical services seems to be on a steady upward climb.

“Conventional wisdom says the yellow metal is a cure for inflation, but gold’s record has been spotty,” says John Waggoner, nationally known financial journalist, writing for Money magazine.

Gold doesn’t pay a dividend or monthly income, so the only way to make money from gold is to buy low and sell higher.

Unfortunately, while gold has been a glittery standout at the jewelry counter, it hasn’t always excelled in other respects.

The price of gold actually fell in the two decades from 1980 to 2000, generating a negative return for investors.

And over the long haul, from 1900 to 2011, the real annual return for gold has been dismal, says Waggoner. Gold generated returns of about 1% per year, after inflation, not much better than cash. Over the same period, stocks earned over 5% per year, he reports, making stocks the hands-down winner.

With numbers like that, it’s hard to make the case for gold being a consistently effective inflation-fighter.

The problem is that gold is not always a reliable investment.

Its performance can be erratic, just like stocks. After losing money in the 80s and 90s, gold bounced back and trounced stocks from 2000 to 2016 as stocks suffered through the bursting of both the tech and real estate bubbles (see gold’s “boom and bust” chart). However, over the entire 1984 to 2016 period, stocks edged out gold for the greatest returns and a slightly smoother ride.

The Takeaway: Worried about keeping up with rising prices? Gold and other commodities may deserve a place in your portfolio, but your best defense is arguably a diversified income-producing portfolio of stocks and other investments, not a pocket full of gold.

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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